Auditing - Chapter 17

Explanatory paragraph

A paragraph inserted in an auditors' report to explain a matter or to describe the reasons for giving an opinion that is other than unmodified. This term is still used in PCAOB standards, but has been replaced in AICPA standards by an emphasis of matter paragraph and an other matter paragraph.

Modified opinion

A qualified opinion, an adverse opinion, or a disclaimer of opinion.

Standard report

An audit report with 1) an unmodified (unqualified) opinion and 2) no additional matters emphasized (e.g., change in according principles) beyond the info. required in all audit reports. Note that while this term is frequently used in practice, the AICPA no longer formally uses it in its standards.

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in:

An emphasis of matter paragraph to the auditors' report

The auditors' report should be dated as of the date the:

Auditors have accumulated sufficient evidence

Material

Being of substantial importance. Significant enough to affect evaluations or decisions by users of financial statements. Information that should be disclosed in order for the financial statements to constitute a fair presentation. Determining what is material involves both quantitative and qualitative criteria.

An audit report for a public client indicates that the financial statements were prepared in conformity with:

Generally accepted accounting principles (United States)

An audit report for a public client indicates that the audit was performed in accordance with:

Standards of the Public Company Accounting Oversight Board (United States)

The auditors know that the client's accounting for deferred income taxes is not in accordance with GAAP, but because of a very significant scope of limitation they have not been able to determine the amount of the misstatement involved and have not been able to form an opinion of the financial statements taken as a whole. What type of report should they issue?

The auditors should is a disclaimer of opinion since they are unable to form an opinion or have not formed an opinion as to the fairness of presentation of the financial statement.

Unmodified opinion

The opinion expressed by the auditors when they conclude that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework (e.g., GAAP).

Howard Green, a partner with Cary, Loeb, & Co., and his audit team have completed the audit of Baker Manufacturing. Determine the proper date of the audit report.

The proper date of the audit report is February 20, 20X1, when all audit procedures were completed, including the review of all audit documentation.

Unmodified opinion - standard report

This report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the financial statements are not misstated and there is no need to alter the report for all other types of unmodified reports.

Unmodified opinion - with an emphasis of matter paragraph

To emphasize a matter of appropriately presented in the financial statements (e.g., a change in accounting principles)

Unmodified opinion on group financial statements

When two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take responsibility for the work of the component auditors.

A material departure from generally accepted accounting principles will result in auditor consideration of:

Whether to issue an adverse opinion rather than a qualified opinion

Pervasive

undetected effects or possible effects on the financial statements of misstatements due to an inability to obtain sufficient appropriate audit evidence.

Comparative financial statements

A complete set of financial statements for one or more prior periods included for comparison with the financial statements of the current period.

Which of the following is least likely to result in inclusion of an emphasis of matter paragraph in an audit report?

A decision not to confirm accounts receivable

Disclaimer of opinion

A form of report in which the auditors state that they do not express an opinion on the financial statements.

Qualified opinion

A modification of the auditors' standard report, employing a clause such as except for to limit the auditors' opinion on the financial statements. Indicates that, except for the effects of some limitation on the scope of the audit or some departure from GAAP, the financial statements are fairly presented.

Basis for modification paragraph

A paragraph added to a report with a modified opinion (qualified, adverse, or disclaimer) that provides a description of the matter giving rise to the modification. Paragraph placed immediately before opinion paragraph in the auditors' report and use the heading "Basis for Qualified Opinion/Adverse Opinion/Disclaimer of Opinion," as appropriate.

Which of the following ordinarily involves the addition of an emphasis of matter paragraph to an audit report?

A qualified opinion

Scope limitation

A restriction that prevents the auditors from being able to apply all of the audit procedures that they consider necessary in the circumstances. Scope limitations may be client imposed or may be imposed by other circumstances.

Component auditors

Auditors that audit one or more components of a group of entities that provide consolidated financial statements. In the PCAOB standards, component auditors are referred to as other auditors.

Inability to obtain sufficient appropriate audit evidence (scope limitation)

Not material: unmodified Material but no pervasive: qualified Material and pervasive: disclaimer

Assume that the opinion paragraph of an auditors' report begins as follows: "With the explanation given in Note 6,...the financial statements referred to above present fairly..." This is:

The is an improper type of report

Discuss types of information that may indicate substantial doubt about a client's ability to remain a going concern.

The types of information that may indicate substantial doubt about a client's ability to remain a going concern are: negative cash flows from operations, defaults on loan agreements, adverse financial ratios, work stoppages, and legal proceedings.

Explain the auditors' obligation in such situations.

1) Document in the working papers the conditions and events and significant management plans, the auditing procedures performed to evaluate management's plans, the conclusion about whether substantial doubt exists, and their consideration of the adequacy of financial statement disclosures. 2) If substantial doubt still exists about the company's ability to continue as a going concern auditors should add an emphasis of matter paragraph or issue a disclaimer of opinion.

Share responsibility opinion

An auditors' report in which the principal auditors decide to share responsibility with other auditors who have audited some segment of the client's business. The sharing of responsibility is done by making reference to the other auditors. Making reference is not, in itself, a qualification of the auditors' report.

Adverse opinion

An opinion that the financial statements do not fairly present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. This situations occurs when the auditors believe that departures from GAAP are both material and pervasive.

Going concern

Auditors not required to perform procedures specifically designed to test going-concern assumption but must evaluate the assumption. 1) negative gash flows from ops 2) defaults on loan agreements 3) adverse financial ratios 4) work stoppages 4) legal proceedings

Group auditors

Auditors that are responsible for issuing the audit report on a group of companies (e.g., a parent and its subsidiaries). In the PCAOB standards, group auditors are referred to as the principal auditors.

Change in accounting principle

Changes in accounting principles and reporting entities result in an emphasis of matter paragraph being added to the auditors' report.

Materially misstated financial statements (departure from GAAP)

Not material: unmodified Material but no pervasive: qualified Material and pervasive: adverse

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is:

Not to construed as a qualification, but rather as a division of responsibility between the two CPA firms

When the matter is properly disclosed in the financial statements, the likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit opinions?

Qualified, No and Unmodified with Emphasis of Matter, Yes

What type or types of audit opinion are appropriate when financial statements are materially and pervasively misstated?

Qualified, Yes and Adverse, No

A change in accounting principles that the auditors believe is not justified is likely to result in which of the following types of audit opinions?

Qualified, Yes and Unmodified with Emphasis of Matter, No

Emphasis of matter paragraph

Same as chapter 16 (e.g., lack of consistent application of GAAP, substantial doubt about an entity's ability to continue as a going concern)

Unmodified opinion - with an other matter paragraph

To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements)

Assume that CPAs are attesting to comparative financial statements. Can the CPAs express differing opinions on the sets of financial statements of two successive years?

Yes, CPAs can express differing opinions on the sets of financial statements of two successive years. This may be warranted because new information may have come to light that causes the auditors to alter their original opinion.